Just five years ago, the commercial real estate market was thriving. The delinquency rate on mortgage loans was at a record low, and the volume of new mortgages being sold to investors was at a record high. Now the first of the mortgages that were securitized in 2007 have started to come due, and it is becoming clear just how bad many of the loans were. The time when investors were most eager to buy turns out to have been the worst time to do so.

Commercial mortgages — unlike residential ones — are seldom issued for periods of longer than 10 years, and often for as little as five. Many require no principal repayments during that period but call for the entire amount to be repaid in a balloon payment at the end of the loan. So it can be at maturity when the bad news arrives.

“Only 28 percent of the loans from 2007 due to mature in 2012 managed to pay off in full,” said Manus Clancy, the senior managing director at Trepp L.L.C., which monitors the commercial mortgage market.

Other loans in those securitizations were for seven or 10 years, so new waves of losses may arrive in 2014 and again in 2017.

Perhaps no loan that was securitized in 2007 illustrates the craziness of the market at the time better than one for a group of apartment buildings in Manhattan. The owner of the buildings was already under investigation for the tactics he had been using to raise rents, but that fact was not mentioned in the prospectus for the securitization. What was disclosed was the supreme optimism involved in underwriting the loan. The 36 apartment houses, owned by a group run by Joel S. Wiener, had produced cash flow of $5.4 million in 2006, but they secured a loan of $204 million, on which annual interest payments of $12.7 million would be required.

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The loan went into default in early 2009, but Pinnacle continued to run the apartments. In November, the securitization sold the loan for $116.7 million. Ben Carlos Thypin, the director of market analysis at Real Capital Analytics, calculates that after all fees are considered, “the net loss to bondholders was 49 percent of the original loan balance.”

Ben Carlos Thypin

I am currently the co-founder of Quantierra, the world's first data driven real estate brokerage and investment manager. In my former life as Director of Market Analysis at Real Capital Analytics, I worked with press outlets large and small to provide them with great data and insightful commentary. Here are some of the results of this collaboration. For the rest, please check out the News Archive.